How to Calculate Value Added

 

How to Calculate Value Added
By Bill Lee

My definition of value added is the difference between the price your company pays for a product and the price your customer pays -- frequently referred to as gross profit. T

hrow in services and the value added grows in the customer's mind.

Here's how this concept looks as a formula:

 

Your Customer's Cost less Your Company's Cost + Services = Value added (GPM)

It's the sales force's job to justify to the customer the amount of markup or value added that the company earns over and above the company's cost. When the sales force fails, they often lose the order to a competitor.

Here are a few of the possibilities that could cost a salesperson the sale:

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• For whatever reason, your salesperson was simply outsold by the competition. Your competitor was more persuasive, had a better relationship with the customer or presented their case more effectively.

• The competition had a lower price because they negotiated a lower cost from the manufacturer.

• The competition had a lower price because their bid contained less value added than your company offered.

• The competition had a lower price because they were willing to make the sale and earn a lower gross margin.

• The competition offered a lower price plus the customer perceived the competition's value added to be greater than your company offered.
Customers almost always make buying decisions based on reasons they believe to be the best for their company.

However, it's the salesperson's job to make sure that the customer is armed with all of the facts. Apples-to-apples comparison: This is one of the most effective methods salespeople use to illustrate to the customer that the price on the bottom line of the competition's quote is not necessarily a valid way to make a buying decision.

The customer must scrutinize the items that make up the quote to make sure that each bid received is comparable. If the customer is not willing to do this much analysis, the salesperson is advised to do it for the customer Service Factors.

And then there are measurable service factors that may not be obvious to the customer:

• Return policy.
• Terms of Sale.
• Restocking charge.
• Delivery capability, size and capacity of equipment, etc.
• Accuracy of deliveries.
• Manufacturing or assembly capability.
• Services the respective salespeople personally perform.
• Quality of estimates.
• Quality of material.
• Accuracy of billing.
• Installed sales capability.
• Incidences of backorders.
• Timeliness of pickups material to be returned.

How effective is your sales force at justifying your company's value added? Perhaps how to communicate value added would be a good topic for an upcoming sales meeting. Do you measure your service levels? When you do measure them, the amount of value added is a lot more obvious to your customers and prospects.

Just remember, it's the purpose of the sales force to impart upon customers and prospects the VALUE that both the sales force and the company provides.

In many cases, the VALUE a salesperson offers is equal to the SIZE of the problems he or she is able to help the customer solve. Added value is not always related to the product; many times it has to do with the salesperson's ability to help the customer accomplish one or more of the following:

• Make more money.
• Solve annoying problems, the bigger and the more annoying the better.
• Become more successful.

Suggestion: Make sure that your sales force focuses its attention on more than product and price. Salesmanship involves a lot more than quoting.

Bill Lee is author of Gross Margin: 26 Factors Affecting Your Bottom Line and 30 Ways Managers Shoot Themselves in the Foot http://www.BillLeeOnLine.com

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